Trading overseas overseas isn’t easy, but with a network of advisers on hand, and meticulous planning from you, it can be done well. Ian Halstead looks at how to head off any potential problems.
Trading overseas was never simple, even in the days when a little
local difficulty could be resolved by the arrival of a gunboat or two.
But as the issues affecting international trade become more complex,
the network of advisers on hand to offer support is equally
sophisticated.
If a business goes wrong in the import-export trade, it is almost certainly down to chance, or the failure of management to prepare. But to learn that the ‘just plain dumb’ factor can also still be an influence, according to Peter Hogarth, UK Trade & Investments’ East Midlands director, is also disappointing.
“We tried to head off problems for companies by offering specialist advice via external mentors,” he says. “But we had to abandon the scheme because none of the businesses wished to take up our offer, even though the advice was free. There was the typically British ‘we’ll muddle through’ mindset.”
Hogarth knows, how vital preparation is because he started his career in the building industry. “I was sourcing materials in one part of the world and getting them shipped to another. I realised that you had to be meticulous with all your paperwork,” he says. “Establishing when responsibility for the goods changed hands and how such exchanges would take place were vital. Nothing could be left to chance, and you certainly couldn’t rely on a handshake.
“When I was a buyer, my margin was four per cent, so if anything went wrong we were liable to lose money, and I’d have been looking for another job.”
Although much has changed, Hogarth says some companies still fail to realise the importance of in-house training. “The success or failure of an international deal can be down to the first point of contact,” he says, “and often a company will send a junior member of its sales team overseas. They usually haven’t the relevant expertise, and may be reluctant to ask for help. Either they need an experienced colleague to monitor them, or proper training before they go.”
Some
companies – especially those in markets where profit margins are wide –
prefer to give a third party responsibility for the deal. Dave Totney, managing director of Birmingham finance house Liquidity,
says the trend is marked when companies are dealing with India and
China.
His firm typically deals with Midlands traders who want to
import a container-load or two of goods, worth maybe £50,000 to
£100,000. “We are opportunistic, so we’ve funded imports of everything
from Champagne to electronic picture frames, but now many of our deals
involve electronic components from the Far East,” he says.
Many of Liquidity’s clients are sole traders, who have acquired knowledge of a specific sector while working for a major corporate and wish to fly solo.
“Some people know what goods they want and
where to source them, but don’t have the capital to do the deal because
they haven’t got a track record,” says Totney. “We fill the gap.
We carry out due diligence for them and become their overseas arm. We’ll pay the suppliers – when the goods are on the boat, take responsibility for the delivery, and even pay the hauliers.”
Inevitably, a hands-on approach doesn’t come cheap. “We charge quite large, usually three per cent per 30-day period, regardless of the finance needed,” says Totney. “If someone was importing £100,000 of goods from China, the shipment may take six weeks to reach the UK, so that would cost them £6,000.”
Further up the scale, corporates are likely to turn to a credit insurer, factor or bank. At Atradius, the UK’s largest credit insurer, director Jason Curtis says risk management is vital. “No one can afford to go in cold. We look at what the British company is supplying and assess its relative importance to the economy of its destination country,” he says.
“If two companies wanted to deal with Nigeria, but one was looking to sell carpets in Lagos, and the other was supplying oil industry equipment to Shell, we’d take different views on the relative risks of insuring their deals.
“We rate trading with a multinational, to an established industry, as low risk because you have certainty of payment. The carpet company would be high risk because of concerns about getting goods in, selling them and getting money out.” Atradius has a sliding scale, based on the relative risk of dealing with certain countries, with Western Europe at the top, and Iran and Iraq at the bottom.
Curtis recommends traders consider using letters of credit (LoCs) if there are worries about payment. “If a country has a weak corporate banking sector, and an unsettled political climate, LoCs help, but you must be precise about the documentation,” he says. “We have general sovereign ratings for each country, based on economic influences, and we have to factor in political influences, but it’s often more about performance risks than payment.
“We’re big insurers of defence-related exports and, in Saudi Arabia for example, payment isn’t an issue. If you were exporting to more challenging territories, we would have concerns that our customers may be prevented from doing what they want, raising the risk.”
The timing of payment is also important. “As an exporter, you should always tie payments into an event you can control,” says Curtis. “It’s unrealistic to say ‘delivery is at your factory gate’. Saying it’s ‘when the goods reach the buyer’ should be a last resort.”
And there’s always the fear of currency fluctuations, especially as the global money markets are so volatile. James Thomas, Lloyds TSB Corporate Markets’ regional director, says issues must be factored in from the start. “The risk from exchange movement starts the moment you sign a contract, not when you ship the goods.”
Some companies try to protect themselves against fluctuations by quoting prices with ’plus or minus’ caveats, but Thomas says: “The idea looks OK at first thought, but it’s hard to enforce. If you’re competing with other companies, it may make you less competitive, if they don’t include a similar clause.”
So what are the options for Midlands companies? Thomas says there is still a role for traditional forward contracts, where a value and date for the foreign currency transaction is agreed in advance, or where a band of potential fluctuations is set.
His most important advice is
that companies should seek help. “You find some businesses don’t
understand the concept of hedging, and how it could help them, so they
end up doing nothing, and then lose margins,” he says. “Others wait
until they are hurt, then ask for advice.
Whoever they turn to, they must do it in advance.”
However, the banks are facing serious competition for such business from the factoring industry. Ultimate Finance is part of world’s largest factoring network, Amsterdam-based Factors Chain International. Richard Peplow, its chief executive, says: “Banks want to look after importers because they get business and increase their turnover, but they don’t take a risk by lending the money, the overseas factors do.
“We can make importing and exporting as simple as trading in the UK, though.
We use an FCI member in the relevant country to do credit checks on
customers or suppliers, and assess the markets and the sector, so we
become a company’s sales armoury.”